GE’s Immelt Promises Growth in Industrial Sales: His Cash Hoard Can Help On That

by Dee GillOctober 05, 2012

At a time when the world generally is cutting budgets, General Electric Co. (GE) recently announced that sales of its huge-ticket items like jet engines, gas turbines, energy infrastructure and locomotives are really doing very well. It’s an accomplishment that’s given investors some faith that this massive conglomerate can, at long last, grow again. Suddenly, GE, a perennial dog of the Dow, is a hot stock.

The share price has particularly gained ground since CEO Jeff Immelt’s post-results road show in which growth, finally, was a key theme. Immelt told analysts to expect GE’s underlying industrial sales (excluding acquisitions and disposals) to rise 10% in 2012. He also expects 10% profit growth from those businesses this year and again in 2013.

Those internal gains would go a long way to reverse a five-year revenue slide that’s made investing in GE such a slog. Until 2001, former CEO Jack Welch built the modern GE and its then-delightful investor returns on massive acquisitions. Successor Jeff Immelt’s necessary divestitures during the crises-ridden years that followed have kept Welch-era investors disappointed ever since.

Investors buying GE today are betting that Immelt’s industrial portfolio, paired with the company’s huge wallet, is finally poised to earn or buy growth for their GE shares. (They are also making some assumptions about GE Capital, the company’s other big revenue source, but that’s a topic for another day.)

Immelt has spent the past decade trying to make GE industrial businesses more diversified and less volatile. Now GE sells wind turbines, smart grid systems and oil and gas technology around the world, as well as the big gas power turbines that made it an industry leader in the U.S. a long time ago. In search of specialized products with higher profit margins, Immelt raised R&D spending well-above the company’s traditional levels even while cutting the dividend, resulting, for example, in 12 new jet airplane engines this decade. He focused a lot on emerging markets -- a decision vindicated this year when sales there more than made up for weakness in Europe. Revenues are up in all of GE’s industrial segments this year, which is a big improvement over the widespread declines in 2009 and 2010. The backorder for industrials now is the company’s biggest ever.

Can these businesses continue to perform as Immelt predicts? It would take pages to analyze GE’s businesses individually, but GE’s cash means they don’t necessarily have to be wildly successful. Cash, particularly when used for acquisitions, can cover up a lot of mistakes or slowdowns in the existing businesses by providing instant growth. Immelt’s growth strategy calls for acquisitions of between $1 billion and $3 billion. GE raised $7 billion in a bond issue Oct. 1, mainly because it could, very cheaply. Forecasts call for the company to generate another $100 billion in cash from operations between 2012 and 2016, which could buy a lot of growth if necessary.

It’s important for GE to increase its profit margins now, as many analysts have made doing so a test of Immelt’s leadership. No one believes it will be easy, but the company has every division manager focused on that goal now.

GE has already promised to repurchase shares and raise dividends -- the current dividend yield is close to 3% -- with this newfound success, and that, too, has helped the shares gain ground this year. But what they really want to see is a company that’s growing again, even if those heady days of double-money years are long gone.